Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets
ID: 2487581 • Letter: A
Question
Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain’s name on the 7,000 units. This machine would cost $14,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.
Refer to the original data. Assume again that Polaski Company expects to sell only 29,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 Rets. The Army would pay a fixed fee of $1.80 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year?
Assume the same situation as that described in (2) above, except that the company expects to sell 36,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 7,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 7,000 Rets were sold through regular channels?
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 36,000 Rets per year. Costs associated with this level of production and sales are given below:
Explanation / Answer
Case 1: Regular Sale 29000 units Retail chain 7000 units Regular Sale Retail Chain Total Sales units 29,000 7,000 36,000 Sales $ 58 1,682,000 341,040 2,023,040 Less Direct Material 25 725,000 175,000 900,000 Direct Labour 8 232,000 56,000 288,000 Variable Mfg OHD 3 87,000 21,000 108,000 Variable Selling Expense 2 58,000 3,500 61,500 Contribution 20 580,000 85,540 665,540 Fixed Mfg OHD 9 324,000 Fixed Selling Expense 6 174,000 42,000 216,000 Additional Cost 14,000 14,000 Profit 5 406,000 43,540 125,540 By executing the new order the company is able to generate positive cash flow Case 2: Regular Sale 29000 units US Army 7000 units Regular Sale US Army Total Sales units 29,000 7,000 36,000 Sales/Fees $ 58 1,682,000 12,600 1,694,600 Less Direct Material 25 725,000 725,000 Direct Labour 8 232,000 232,000 Variable Mfg OHD 3 87,000 87,000 Variable Selling Expense 2 58,000 58,000 Contribution 20 580,000 12,600 592,600 Fixed Mfg OHD 9 324,000 Fixed Selling Expense 6 174,000 174,000 Profit 5 406,000 12,600 94,600 Note: No expense is considered in case of sale to US Army as the entire expense is reimbursable The proposition leads to positive cash flow hence may be accepted Case 3: Whether to forego regular sale of 7000 unit or sale to US Army Regular Sale Contribution @ $ 20 140000 Less Fixed Selling Expense 42000 Profit from regular sale 98000 Fees from sale to US Army 12600 Hence better to go for regular sale instead of selling to US Army